Shares of Roblox (RBLX 1.42%) sank after its first-quarter results, despite the virtual gaming platform raising its full-year revenue outlook. The stock is now trading down over 30% year to date.
So why is Roblox's stock getting crushed?
Let's examine the company's quarterly results to find out why, and whether now is a good opportunity to buy the stock.
Revenue versus bookings
The main culprit behind the collapse in Roblox stock was that while it increased its full-year revenue guidance, the company lowered its full-year booking forecast.
In conjunction with its earnings report, Roblox raised its full-year revenue outlook to between $3.45 billion and $3.53 billion, up from a prior range of $3.30 billion to $3.40 billion. However, it lowered its full-year bookings forecast to a range of $4 billion to $4.10 billion, down from a previous view of $4.14 billion to $4.28 billion. First-quarter bookings, meanwhile, came in at $923.8 million, toward the middle of its guidance range of $910 million to $940 million.
So why is Roblox's bookings guidance more important than its revenue outlook?
The reason largely stems from how the company recognizes its revenue. Roblox makes most of its money by getting a 30% cut on each virtual dollar, called a Robux, spent on its platform. The rest of the money goes toward developers and distributors that create and distribute games and other experiences on its platform.
When someone purchases Robux, it initially gets recorded as deferred revenue and gets recorded on the balance sheet as bookings. The sale of Robux is not recognized as revenue until it is used to purchase a virtual item. Durable virtual items are recognized as revenue ratably (a lending term) over a user's expected lifetime on the platform and make up the bulk of virtual items sold, while revenue for consumable virtual items is recognized as revenue when they are consumed.
Given this, Roblox's bookings number is much more indicative of how much money users are currently spending on its platform compared to revenue, much of which gets recognized over about a 28-month period. So when the company lowered its bookings number, it showed that Roblox is currently seeing users spend less on its platform.
That expectation of slower user spending subsequently sent the share plummeting. For its part, Roblox did say bookings growth was starting to pick back up, but it did want to take a more cautious view given that bookings came in at less than expected in Q1.
Growth stocks like Roblox are typically valued based on certain growth assumptions, so when the assumptions are reduced, the stocks often see some type of multiple compression, which is when the valuation ratios used to value the stocks fall. The more a company is growing revenue, or in Roblox's case bookings, the higher a price-to-sales (P/E) ratio it can typically command, while companies with slower growth get smaller multiples.
Image source: Getty Images.
Roblox's expense issues
Bookings aren't the only issue that Roblox faces. It has an expense issue as well.
One of the more common ways to value a stock is using adjusted EBITDA, which takes out noncash items as well as income and taxes. Roblox is one of these companies, and it forecasted full-year adjusted EBITDA of between $95 million to $147 million for the year.
Roblox removes stock-based compensation from this metric, which is common given that it is a noncash item. The problem, though, is that Roblox pays out an enormous amount of stock compensation.
Roblox recorded $240.5 million in stock-based compensation expenses in the quarter. This was up 30% year over year and was also 30% of the revenue it generated in the quarter. That is a massive amount for a company its size. Stock-based compensation is a real expense that companies use to attract and retain employees as part of their pay packages, and its use dilutes shareholders.
When taking stock compensation into consideration, Roblox does not appear to have any near-term path toward profitability.
The company also has the unusual expense line item of infrastructure and trust and safety. Given its young user base, Roblox needs to spend a lot of money to keep them safe and away from online predators. Spending for this line item rose nearly 8% year over year in the quarter to $226.9 million, and it was over 28% of revenue. The company hopes to use artificial intelligence to both improve moderation and lower costs in the process, but right now this expense remains high and also eats away at the company's potential profitability.
Is Roblox's sell-off a buying opportunity?
At this point, I'd stay on the sidelines when it comes to Roblox. The company has a nice opportunity in front of it with bringing advertising and shopping to its virtual worlds, but its egregious use of stock compensation to lower cash expenses is an issue, as is the amount of money it needs to spend on safety.
Given these heavy expenses, Roblox's business model does not appear to have the same profitability potential as many other high-growth businesses. As such, I don't view the sell-off as a buying opportunity.
